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European Stocks Gain Despite Weak Growth Figures--2nd Update

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August 14, 2014

By Josie Cox and Tommy Stubbington

European stocks rose Thursday despite dismal European economic growth figures, while German government bonds jumped to a record high, signaling that investors anticipate further stimulus from the European Central Bank.

Stocks initially fell after the data release, the latest in a string of recent setbacks for the region's economy. But they later recovered those losses, with the Stoxx Europe 600 closing 0.3% higher.

The yield on the 10-year German government bond briefly dipped below 1%--its lowest on record--and well below previous troughs hit in July 2012, when the euro-zone debt crisis threatened to spiral out of control. Yields fall as prices rise.

Bonds in more fiscally-fragile euro-zone nations such as Spain, Italy, Portugal and Greece also gained.

"This smacks of the now familiar 'bad news is good news' market reaction function, [where] poor data is risk positive in that it increases the odds of additional policy support [from the ECB]," said interest-rate strategists at Rabobank.

In equity markets, Paris' CAC 40 and Frankfurt's DAX both added 0.3%.

Citigroup economists said the weak data "continue to highlight the anemic growth backdrop which, coupled with the low inflation environment, signifies prospects of further ECB action later in the year."

The euro edged higher against the U.S. dollar to $1.3375. Kit Juckes, a macro strategist at Société Générale said the heavy weight of existing bets against the euro was leaving little scope for the currency to move much lower against the dollar. "Patience is needed, " he wrote in a note to clients.

Data released last Friday by the U.S. Commodity Futures Trading Commission showed that bets against the euro are already at their highest level since mid-2012.

France reported that its economy had stagnated for a second straight quarter in the three months to June. More eye-catching though, Germany's gross domestic product was also weaker than expected, with the economy contracting 0.2% in the second quarter of the year.

At the start of the year, the euro zone's two core economies were on divergent paths, with Germany surging ahead as French economic growth ground to a halt.

Economists polled by The Wall Street Journal last week had expected the German economy to shrink 0.1% on the quarter.

The composite GDP figure for the whole of the euro-zone came in flat on the quarter androse 0.7% on the same quarter last year.

"We cannot rule out that these numbers mark the beginning of a more prolonged downturn, rather than a dip," said Riccardo Barbieri, Mizuho's chief European economist. Economists at BNP Paribas, meanwhile, termed the figures a "double-ouch" and highlighted that France and Germany account for around 50% of total euro-zone GDP.

"Two downward surprises in the two biggest euro-zone members today, combined with the downward surprise from Italy last weak don't bode well for the euro-zone average," they wrote.

Data last week showed that Italy has slipped into its third recession since 2008. The country's economy contracted at an annualized rate of 0.8% in the quarter ended June 30, according to a first estimate by national statistics institute Istat, surprising some economists who had even forecast a return to slight growth.

Commenting on the French figures, economists at Barclays struggled to identify any reassuring signs in the breakdown of the data.

"All in all, we see very limited leeway for a significant pick up in the economy's momentum," they wrote in a note to clients.

"The implication of today's disappointment is that our 0.6% and 1.3% growth forecasts for 2014 and 2015, respectively, have come down by 0.1 percentage points to 0.5% and 1.2%. If anything, we think risks are skewed to the downside," they said.

Elsewhere in Europe, Dutch GDP expanded by 0.5% on the quarter and by 0.9% on the year, providing some relief after a surprisingly weak first quarter, which saw a contraction of 0.4% due to a drop in gas exports as a result of a mild winter. Austria's economy grew at a modest 0.2% rate, an improvement on the 0.1% recorded in the first quarter, while Slovakia matched Spain in recording growth of 0.6%. For economists, however, those figures appeared to offer only limited consolation.

Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi UFJ said that Thursday's figures only "reinforce investor concerns over the euro-zone growth outlook at a time when rising geopolitical tensions have also increased downside risks to growth."

In commodities, gold fell 0.1% to $1,312.90 a troy ounce. Brent crude was 2.4% lower at $102.59 a barrel, on continued concerns about weak demand after the euro-zone data.

Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at tommy.stubbington@wsj.com